The Fundamentals of How India Makes Its Money

India, a former British colony that has been independent for over 70 years, is currently the fastest growing economy in the world. According to 2018 IMF data, it also has the seventh largest nominal GDP (and third largest purchasing power parity (PPP)) in the world. The country, once a supplier of British tea and cotton, now has a diversified economy with the majority of activity and growth coming from the service industry. Since the economic liberalization policies of the 1990s, many Indians have seen their quality of life improve substantially.

Historical Growth

In 1947, India gained independence from Britain and created a centrally-planned, mixed economy. The country’s economic focus was on heavy industry and was eventually deemed unsustainable. In 1991, India began to loosen economic restrictions and leverage international trade. The country’s economy began to grow exponentially – from $293 billion in 1992 to $2.6 trillion in 2017.

Agriculture

Agriculture, once India’s main source of revenue and income, has since fallen to only 17% of the country’s GDP as of 2017. However, analysts are quick to note that this fall should not be equated with a decrease in production but rather a relative fall when compared with the large increases in India’s industrial and service outputs.

Agriculture in India has some problems. First, the industry is not efficient: millions of small farmers rely on monsoons for the water necessary for their crop production. Agricultural infrastructure is not well developed, so irrigation is sparse and agricultural product is at risk of spoilage because of a lack of adequate storage facilities and distribution channels.

Despite this, production is increasing. Today, India is a leading producer of lemons, oilseeds, bananas, mangoes and papayas, and the second largest producer of wheat, rice, sugar cane, many vegetables, tea, cotton and silkworms (among others).

Industry

Chemicals are big business in India; the chemical sector contributes about 2.11% to the Indian GDP in 2016. The petrochemical industry contributes approximately 30% to India's chemical industry which is expected to become a $250 billion industry by 2020. In addition to chemicals, India produces a large supply of the world’s pharmaceuticals as well as billions of dollars worth of cars, motorcycles, tools, tractors, machinery and forged steel.

The cost of India’s economic industrial boom seems to have come at the cost of human rights and illegal operations, reports the BBC. Not only are resources being illegally extracted, but people who live near mines are suffering from health problems associated with the under-regulated industry. In addition, there are reports of the mining areas not being fully-assessed and the mines themselves being accident prone.

IT and Business Services Outsourcing

Over the past 60 years, the service industry in India has increased from a fraction of the GDP to over 55% in 2018. India, with its high population of low-cost, skilled, English-speaking, educated people, is a great place for doing business. IT companies contributed almost 8% of the country’s GDP in 2016, and the workers are employed by both domestic and international companies including Intel (INTC), Texas Instruments (TXN), Yahoo (YHOO), Facebook (FB), Google (GOOG), and Microsoft (MSFT).

Business process outsourcing (BPO) is a less significant but more well-known industry in India and is led by companies like Amex (AXP), IBM (IBM), HP (HPQ) and Dell. BPO is the fastest growing segment of the ITES (Information Technology Enabled Services) industry in India thanks to economies of scale, cost advantages, risk mitigation and competency. BPO in India, which started around the mid-90s, has grown by leaps and bounds.

However, Bangalore, called the Silicon Valley of India, is a prime example of the problems that India faces with its international business service sector. Companies and local administration clash over government policy with the companies wanting better infrastructure and the governments wanting to serve their electorate. Additionally, employees at companies that provide outsourcing services throughout India struggle to adopt more western mannerisms and language to appear more like their parent companies, a practice that is considered detrimental to the traditional Indian identity.

Retail Services

The retail sector is huge. In fact, it is the second largest in the world with retail sales expected to exceed $1.2 trillion by 2018, according to a study by ASSOCHAM-Resurgent India. But its not just apparel, electronics or traditional consumer retail that is booming; agricultural retail, which is important in an inflation-conscious country like India, is also significant.

Reports suggest there is little storage for Indian agricultural products and 20% to 40% of the agricultural output of the country is lost to spoilage. Between 2013 and 2016, reportedly over 46,000 tons of grain was spoiled or stolen that could have fed over 800,000 people for a year on the government's subsidized food scheme. FDI in cold storage solutions are allowed by the Indian government but, so far, there has been little interest.

Retail reform is happening. India is relaxing some barriers to foreign entry and hoping to spur an increase in the number of foreign retailers in the country. However, there is opposition and debate about whether or not to let large foreign companies like Wal-Mart (WMT) to open stores in India. The arguments against Wal-Mart are similar to those in the United States while the arguments for Wal-Mart center on the money and infrastructure support that the company would bring.

Other Services

Other parts of India’s service industry include electricity production and tourism. The country is largely dependent on fossil fuels oil, gas, and coal but is increasingly adding capacity to produce hydroelectricity, wind, solar and nuclear power.

Medical tourism to India is growing at an incredible rate. The industry was estimated in 2016 at $8 billion and is expected to rise at a compound annual growth rate (CAGR) of 15% to 25% until 2020, according to the Congress of Neurological Surgeons. Medical tourism is popular in India because of its low-cost healthcare and international standards compliance. Customers come from all over the world for heart, hip and plastic surgery procedures, and a small number of people take advantage of India’s commercial surrogate facilities.

The Bottom Line

India’s economy is enormous and is expected to grow at a rate of 7.3% in 2018 and 7.5% for the subsequent two years, according to the World Bank. The nation is the fastest growing country among major emerging economies. India has surpassed China in the pace of growth and become a focus of investors across the globe. However, in its attempts to become a developed country, problems still plague India such as malnutrition, lack of infrastructure and education, poverty and corruption.

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